ATA Inc (NASDAQ:ATAI), a USD$106.67M small-cap, is a consumer services company operating in an industry, whose performance is linked to business conditions and the general economy, as it draws revenue from industries across different sectors. Consumer services analysts are forecasting for the entire industry, a strong double-digit growth of 18.59% in the upcoming year , and an enormous triple-digit earnings growth over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the US stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether ATAI is lagging or leading in the industry. See our latest analysis for ATAI
What’s the catalyst for ATAI’s sector growth?
A main driver of the industry has been the growing relevance of e-commerce for consumer services, enabling companies to reduce cost to serve while growing market presence at the same time. A crucial strategy for incumbents is to be well-positioned in response to the growing importance of pure e-commerce players, as well as building up their own capabilities around e-commerce. In the past year, the industry delivered growth in the twenties, beating the US market growth of 10.30%. ATAI lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its consumer services peers. As the company trails the rest of the industry in terms of growth, ATAI may also be a cheaper stock relative to its peers.
Is ATAI and the sector relatively cheap?
Consumer services companies are typically trading at a PE of 25x, relatively similar to the rest of the US stock market PE of 22x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 16.75% compared to the market’s 10.06%, potentially illustrative of past tailwinds. Since ATAI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ATAI’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ATAI has been a consumer services industry laggard in the past year. If your initial investment thesis is around the growth prospects of ATAI, there are other consumer services companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ATAI fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ATAI has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its consumer services peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ATAI’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into ATA’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other service stocks instead? Use our free playform to see my list of over 100 other service companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.